Objectives And Strategies - Setting Up In Business

Good - A physical product.

Service - An intangible item.

Product - A more general term covering goods and services.

List of inputs:

• - People
• - Capital equipment
• - Materials and components
• - Finance
• - Entrepreneurship
• - Land

List of outputs:

• Goods
• Services
• Waste products

Primary sector - Firms involved in extractive industries, such as mining, fishing and forestry.

Secondary sector - Businesses involved in manufacturing, such as the car industry.

Tertiary sector - Organisations in the service sector, such as universities, banks and the travel industry.

The size of a firm can be measured in terms of:

• The value of its sales revenue
• The share of the market it has
• The number of workers employed
• The value of the things it owns (assets)

The process of business involves turning inputs into outputs.

Firms take resources and transform these in some way to produce a product.

To be successful, the value of the outputs needs to be greater than the value of the inputs.

The selling price of the outputs must exceed the cost of the inputs, which is how firms add value.

The most successful organisations are those which can manage this transformation process most effectively. This means that they use their resources efficiently and do not waste them, and that they produce goods and services which their customers value highly.

The first thing to do if you are thinking of setting up a business is to identify a business opportunity and decide exactly what product or service you want to offer.

You will need to be sure that there is a market for your product or service from you, rather than someone else.

Another matter to consider is the cost of running a business.

When considering a business idea there are a number of factors involved:

• Is there any likely demand? How many units?
• Is the idea profitable?
• Will you be able to provide the product or service? Skills? Difficulty?
• Would people buy the product or service from you rather than other firms? Better price? Better service?

You will need to find out about the market and about customers' needs and wants when researching setting up a business.

Market research helps information be discovered:

• What do potential customers like and dislike?
• How much are potential customers prepared to pay for the product?
• What are competitors' prices?

As many individuals are short of money to use market research, they use the money that  they do have to develop the product rather than finding out what customers actually want.

Market research - The process of gathering and analysing information about customers' needs and the nature of the market for a product.

Primary research - Gathering data for the first time.

Secondary research - Using data that already exists.

Primary research can be tailored precisely to your own needs, but can be quite expensive and time consuming, compared with using information already collected.

If you want your business to be successful, you must be sure that there will be enough demand for your good or service.

You must also be sure that your sales will be high enough to cover your costs in the long run.

How much you earn from your business will depend on how many items you expect to sell, and how much you charge for each one.

Total revenue = Number of units sold x average selling price.

Charge too much and you may not sell enough.

Charge too little and you may sell a lot, but not enough to make enough revenue to cover the costs.

The level of demand for a product will also depend on the good or service itself.

Is it something people want?

Does it meet needs?

What else is available?

Are their competitors offering a similar or better product at a better price?

A successful product is one that offers good value for money.

Good value for money means that it provides a high levels of benefits compared with the price charged.

A product or service is more likely to be successful if it has a unique selling point (USP).

A USP is something which makes it different from competition.

It is possible to gain some protection by taking out a patent or through copyright legislation.

A patent gives inventors the rights to an invention of a new product or process under the Copyright, Designs and Patents Act (1988), which lasts for 20 years.

Taking out a patent means that other firms cannot copy your invention unless you agree to license it to them.

To really protect your idea you need to take out patents all around the world to prevent it being copied elsewhere, which can be expensive.

Firms need to use patents to recover the enormous costs of developing new products, as without protect, they would be unlikely to invest in research into new products.

Taking firms to court involves very high costs.

Firms can protect their products by registering a trademark.

A trademark is any sign that can distinguish the goods and services of one firm from those of another.

A trademark may include:

• Words
• Logos
• Pictures
• Combination of the above

A copyright provides protection for written work, music or plays.

You do nto need to register your work for it to be copyrighted and if anyone wants to copy it they must pay a fee, known as a 'royalty'.

You may have to prove that you were the first person to come up with a particular story or piece of music.

Borrowing from friends and family is good, as they may be willing to wait for some time to be repaid.

However, you may be worried borrowing money from friends and family in case you cannot pay them back.

They may also want to become more involved in the business than you would like, and this can put a strain on your relationship.

Borrowing from the bank has the advantage of being a formal arrangement.

However, banks will charge interest on any money the lend, which means you have to pay them a fee in return for them lending you the money.

The interest charges on any loands may be high because of the risk that the business will fail.

Banks will leave you to run the business for yourself, but they will insist on being paid by a certain date.

Banks may be wary of lending money to a new firm, especially if the person has no previous experience of running a business.

The business may only have a few assets to use as a guarantee for a loan - this is called collateral.

Another way of raising finance is to bring in outside investors.

In return for putting money into the business, they gain some control over it.

You may not want to raise money through investors if you want to remain totally in charge.

The location of a business can be crucial to its survival.

It is important that the business is in a suitable place for employees and suppliers, but especially customers.

The location can be important because it can affect the costs of production and the ease of getting the product to the market.

However, small firms often lack the money to afford the best location.

The best locations may already have been taken, meaning that the new business is immediately at a disadvantage compared with existing firms.

One reason why firms often fail in their early years is because it takes time to build up a base of regular customers.

For the first few months of years, customers may be unaware that your business exists.

Customers may be uncertain about using your business because you are relatively new.

Over time, providing you offer good value of money, you are likely to build up a reputation and attract more people by word of mouth.

You will build up customer loyalty, meaning that the same people come back again and again.

Customer loyalty means that you will have a more steady flow of income and you can predict what you will be earning.

Cash flow refers to the money flowing in and out of a business.

If a business' customers are slow to pay, it may have cash flow problems and be unable to pay its suppliers.

In the early days, a business' suppliers may expect to be paid promptly, making it more difficult to manage cash flow.

Small firms usually lack power in the market.

To win contracts, small firms may have to give customers a long time to pay, while suppliers may insist on being paid quickly because they are afraid the business may not be around for long.

If you are thinking of starting up a business, you should always produce a business plan.

A business plan is a report setting out the objectives, financial projections and market analysis of an organisation.

A business plan sets out what you are hoping to achieve over the coming few years and how you will achieve these targets.

A business plan should include:

• Objectives
• Information on the market and competitors
• Sales estimates
• Estimates of costs, revenues and profits
• Research on customer needs and how the business will meet these needs
• Information on what makes your business different from the competition

Producing a business plan is useful because it makes business starters think carefully about what they are doing.

Planning makes you look into detail at the different aspects of the idea and consider some of the potential problems.

A business plan is a useful document if you are hoping to raise money, as banks nearly always insist on seeing a business plan.

Banks often provide individuals who want to start up in business with a pack of information to help them formulate a plan.